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How to Implement Dynamic Pricing Strategies with AI

A dynamic pricing strategy analyzes factors such as demand, consumer behavior, market conditions, and competition to adjust the cost of your brand’s offerings in real-time. Such a strategy allows businesses to maximize their revenue at all times by attaching the right price tag at the right time to their goods and services.

You must have experienced this while booking a hotel room. During peak demand periods, such as the holiday season, hotels increase their prices to maximize their profits and conversely, decrease their prices during slower seasons to attract more bookings.

The dynamic pricing strategies of hotels consider factors such as booking patterns, occupancy levels, etc., to optimize the costs of their rooms to maximize revenue. Various businesses have empowered themselves with such a strategy to adapt to the dynamic nature of today’s fast-paced market landscape.

As dynamic pricing explicitly impacts your business’ margins, it directly impacts revenue recognition. Revenue recognition is an accounting operation process of accurately identifying and recording a company’s revenue. Accurate revenue recognition is essential as it reflects your brand’s financial integrity and, more importantly, keeps legal troubles away.

In this article, let’s look at whether dynamic pricing is right for your business, some examples of SaaS brands that have implemented a dynamic pricing strategy successfully, the factors that affect dynamic pricing, and how you can use artificial intelligence (AI) to build a more effective dynamic pricing strategy.

Is dynamic pricing right for your business?

Now that we have understood dynamic pricing and revenue management, let’s take a closer look at the advantages and disadvantages of implementing it.

 

Advantages Disadvantages
Increased customer satisfaction as the pricing is optimized based on market conditions Could negatively affect customer sentiment as it can be perceived as unfair

 

 

Brand growth by setting pricing of brand’s offerings with market positioning and customer perception Increases risks of errors and mistakes, resulting in potential revenue loss and customer dissatisfaction

 

 

Being agile in responding to changing market conditions and capitalizing on new opportunities while minimizing losses Potential loss of customer trust and loyalty if pricing strategy is not transparent and perceived as arbitrary

 

 

Offering more options to the customers leading to larger market share as you can target a wider segment Increased resource requirements for implementing and managing dynamic pricing strategies

 

 

Staying ahead in the market by keeping your prices competitive and profitable consistently Legal and ethical challenges, including compliance with pricing regulations and anti-discrimination laws (e.g. laws against predatory pricing)

 

 

Dynamic pricing strategy works well for some industries and not so much for others. For example, consider the airline industry, where factors such as demand, seat availability, and competitor pricing are considered by various aviation companies to adjust air ticket prices in real-time to maximize revenue.

However, an identical strategy might backfire in the retail industry. Imagine grocery stores implementing a dynamic pricing strategy where they consider the past purchases of the customer, production costs, and local demand to charge the same item differently at once. This might lead to significant customer dissatisfaction and erosion of trust, leading to churn.

To work around such challenges associated with dynamic pricing and its disadvantages (as mentioned in the table above), you can take steps such as:

1. Make your pricing strategy transparent and provide clear explanations to your customers about price variations of your products and services

2. Ensure that your pricing is accurate by focusing on the right aspects of your business with the help of the right tools (more on this below)

3. Constantly monitor market trends to verify your insights to minimize human errors while adjusting the prices of your products

4. Collaborate with legal bodies to learn about regulations and ethical factors and shape your pricing strategy accordingly

5. Communicate openly with your customers whenever you make a significant pricing change or modify your pricing strategy

Examples of dynamic pricing for pricing optimization and revenue management

Various B2B SaaS brands have mastered their dynamic pricing strategies to maximize their revenues in changing market conditions while keeping their customers happy and loyal to their brand by delivering them the value they have paid for.

Let’s look at three examples to learn what makes them stand out:

1. Chargebee: A recurring billing and subscription management tool for SaaS businesses that offers features such as usage-based billing, in-app purchase management, and custom domain, along with additional paid add-ons.

2. Canva: A graphic design platform that offers different pricing plans for individuals and teams, including a free plan with limited access to premium features, Canva Pro for unlimited access, and Canva for Teams with collaboration features.

3. Mailchimp: An email marketing platform that offers different pricing plans, including discounts for nonprofits and charities, and a pay-as-you-go plan for infrequent senders. Mailchimp also offers automatic billing for overages and provides a high-volume plan for businesses with larger subscriber lists.

These brands have understood their product’s unique value proposition (UVP) which helped them build a pricing strategy that helps their customers get their money’s worth.

The notable aspect of Chargebee is usage-based pricing, Canva is creating distinct plans based on its customer’s demographics, and Mailchimp is the pay-as-you-go model for infrequent senders.

So, how can you identify the factors that impact your brand’s dynamic pricing strategy? More importantly, how can you automate this strategy using AI?

Let’s start by looking at the factors that you need to consider while creating a dynamic pricing strategy for your SaaS brand.

Factors to consider when implementing dynamic pricing

You can broadly segment factors that impact your pricing decisions into three categories:

1. Business factors: These factors are unique to your brand. This involves three essential components:

a. Fixed and variable expenses: Analyze your fixed and variable costs. In the example of a web hosting company, the fixed cost will be the overhead costs of the office and the variable cost will be your server maintenance costs as they depend on the usage of the customers.

b. Competition and growth stage: How similar products are priced? Which phase of growth are you currently in? Are you looking to retain existing customers or gain new ones quickly? How better is your product or service compared to others that have similar prices?

c. Brand value: If you are a high-end enterprise SaaS brand, for instance, your pricing needs to reflect that. If you are marketing yourself as an affordable solutions provider, you need to keep your prices budget friendly for most.

You can use a solution like Zapier which helps businesses automate workflows by connecting various apps. Recently, they announced an integration with OpenAI’s ChatGPT and DALL-E allowing you to automate your workflows with the help of AI. This can translate into lower business costs and a greater ability to offer dynamic pricing.

2. Customer factors: These are the factors that focus on how your brand exists in the minds of your customers or how your customers view you.

a. Price sensitivity of your customers: It usually depends on the industry you are in. For instance, if you are selling groceries, an occasional price hike might increase your sales as your customers might perceive that demand is high. However, it may not work as well for luxury items.

b. Brand value perception: If your customers perceive your brand’s offerings as an important commodity, you can increase your price. However, it depends on the time you adjust your prices, as we mentioned in the airline and hotel examples above.

c. Brand loyalty: Loyal customers may be willing to pay a bit extra as they feel closer to your brand whereas new customers tend to be price sensitive and might churn if you increase your prices by too much.

You can keep an eye on customer sentiment with a tool like SupportLogic that uses AI and natural language processing to extract actionable insights from your customer’s messages. This will allow you to get instant feedback which will help you recalibrate your dynamic pricing strategy.

3. Market factors: These factors are related to the industry you are in and the target market you serve. The three essential market factors you need to consider are:

a. Varying consumer demand: You can set higher prices when the demands are high, particularly during holiday seasons, and offer discounts in slow seasons to stimulate demand and increase sales.

b. Competitor pricing: When new competitors enter the market or existing competitors roll out new offers (or products or services), you might need to adjust your pricing accordingly.

c. Laws and regulations: There are various legal and regulatory restrictions that you should be aware of while implementing dynamic pricing. For instance, some pricing regulations need to offer your products at a specific rate to prevent predatory pricing.

Keeping an eye on market factors can be challenging because market data comes in various shapes, forms, and sizes. This is where a solution like Codeit can come in handy which helps teams turn unstructured data into actionable insights.

Wrapping up

Dynamic pricing strategies help businesses maximize their revenue and minimize their losses by offering their goods or services at attractive prices based on ever-evolving business processes, customer perception, and market conditions.

However, it can get challenging for SMBs to monitor all the aforementioned factors to keep their prices optimized without making mistakes.

Fortunately, by leveraging AI-powered tools such as Zapier, SupportLogic, and Codeit, brands can easily gain actionable insights from changing conditions such as demand, customer behavior, and business goals to offer their products or services at friendly prices.

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